OREANDA-NEWS. June 30, 2015. Fitch Ratings has affirmed the 'A' rating on Golden Spread Electric Cooperative's (Golden Spread or GSEC) \\$36.38 million 5.75% senior secured notes, series 2005.

The Rating Outlook is Stable.

SECURITY

Senior secured notes are first mortgage obligations of Golden Spread. The notes are secured under a trust indenture which has a first lien on tangible and intangible assets.

KEY RATING DRIVERS

NEW OPERATING MODEL: Golden Spread's operating model has evolved from a strategy dependent on purchased power agreements in favor of owned generation and greater plant diversity. The strategy appears well designed and effectively managed and is intended to optimize long-term power supply costs with the forthcoming expiration of certain power supply contracts.

ONGOING CAPITAL EXPENDITURE PROGRAM: Starting in 2010, GSEC undertook a major capital expansion program to make adjustments to its power supply program. Over the past several years, GSEC constructed over 400 megawatts (MW) of new capacity, purchased 244 MW of combined-cycle capacity and executed two long-term term fixed-price wind purchase power agreements (200 MW). Also, in June 2015, a new 190 MW simple-cycle plant was completed and began commercial operation. Related capital expenditures have so far exceeded \\$700 million.

STRONG FINANCIALS: GSEC's historical financial ratios have been well above rating category medians, with Fitch-calculated 2014 debt service coverage (DSC) at 2.51x, coverage of full obligations at 1.63x and days liquidity on hand at 318 days. With an expected decline in capital expenditures after 2016 and increased sensitivity to the competitiveness of electric rates, the board is considering a move to a 1.50x annual DSC target, which would still provide good bondholder protection.

MEMBERS' METRICS SUPPORTIVE: Golden Spread's financial position is supported by the healthy credit quality of its 16-member distribution cooperatives, who reported sound consolidated ratios for DSC and equity ratios of 2.83x and 48.67% in calendar year 2014, respectively.

INCREASED RELIANCE ON NATURAL GAS: GSEC's heavier reliance on natural gas-fired generation and the desire to maintain a flexible power supply strategy could expose the cooperative and its members to greater fuel price volatility, despite a percentage of fuel being hedged.

RATING SENSITIVITIES

ABILITY TO COMPLETE CAPITAL PROGRAM: Golden Spread's ability to execute and complete its capital plan in a timely manner, and to successfully assume a greater role in overseeing its new power-supply resources and business operations, will be important factors in the cooperative's long-term credit rating.

COMPETITIVE RATE PRESSURE: Intensified competitive rate pressures that impinge upon financial metrics could result in a downward rating adjustment.

CREDIT PROFILE

Golden Spread is a generation and transmission (G&T) cooperative providing wholesale electric service to 16 member-distribution systems. The members cover a 61,700 square mile service territory and serve approximately 231,000 retail customers in two different North American Electric Reliability Corporation (NERC) reliability areas; the Electric Reliability Council of Texas (ERCOT) and the Southwest Power Pool (SPP).

Over the past several years, Golden Spread has advanced from a utility that purchased the full energy requirements of its members, to one that is exercising considerable control over its power-supply resources. Less reliance on outside consultants, with the hiring of more permanent utility staff, has also occurred.

Golden Spread's power supply strategy for the period 2016 through 2020 incorporates the addition of 380 MW of simple-cycle combustion turbines, along with 150 MW of solar capacity procured under purchase agreements. Capital expenditures for remaining projects are estimated at around \\$200 million. These additions will help offset the scheduled expiration of power-supply contracts with SPP-based Southwestern Public Service Company (May 2019) and ERCOT-situated AEP Energy (May 2017).

COMPETITIVE RATES

GSEC is subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC) for corporate and rate regulation related to its activities in SPP, and is subject to the regulation of the Public Utility Commission of Texas for certain non-rate activities in both ERCOT and SPP.

Golden Spread's system service rate (SSR) to members, which accounts for nearly all member revenue, is a formulary rate (i.e. 'postage stamp to all customers') set annually based on projected revenue requirements and billing units. The SSR combines full operating costs plus a margin. It includes an automatic pass-through of fuel (monthly), including generation and purchased power. At year end, rate design is reconciled to actual costs.

The rate forecast assumes long-term wholesale rates plateauing at around \\$65/MWh over the next several years, which is down from a prior forecast of over \\$70/MWh. This primarily reflects the elimination of a planned combined-cycle plant and the substitution of a solar purchase power agreement for an owned simple-cycle combustion turbine. Member customer rates for 2014 were as follows: residential (12.13 cents per KWh); irrigation (11.38 cents) and commercial (9.22 cents), and reflect a service territory that includes a high concentration of rural and irrigation customers and a lower average load factor and customer density.

STRONG FINANCIALS

GSEC's financial performance has been relatively steady, although revenues and operating expenses at the member level will fluctuate due to the amount of wholesale costs and distribution expenditures. For fiscal 2014, Fitch-calculated DSC and Debt/FADS totaled 2.51x and 5.6, respectively, compared with 2.56x and 6.3 in 2013. The upward trend in leverage ratios through 2013 is a direct result of GSEC's increased construction and financing activity, but ratios still remain solidly in line with comparable medians for its rating category.

With the moderation of capital expenditures and increased sensitivity to the competitiveness of rates, the Golden Spread board is considering a move to a DSC target of approximately 1.50x. While a reduction from historical levels, Fitch views GSEC's financial targets as reasonable.

At Dec. 31, 2014, GSEC had available cash and investments of approximately \\$135.6 million, in addition to lines of credit totaling \\$270 million for the financing of its construction program, meeting contractual obligations and for other liquidity needs. At year-end 2014, \\$51.1 million was borrowed under these credit lines.